In economics, inflation is a general rise in the price of goods and services in relation to purchasing power.

Prices tend to go up when demand from consumers exceeds the normal capacity of producers to supply goods and services. An excess supply of goods and services tends to put downward pressure on prices.

High inflation undermines the economy's ability to generate long-lasting growth and job creation. Consumers and investors may put off purchases because of uncertainty. High inflation erodes the value of incomes and savings. People on fixed incomes, including the elderly and poor are particularly vulnerable to inflation. Social Security payments are adjusted to inflation.

The common measure for consumers is the Consumer Price Index (CPI). Economists prefer a broader measure, the "implicit GDP deflator", which includes the prices of non-consumer items like highways and factories.

In the U.S. the inflation rate was near zero in 2009.

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Hyperinflation

Hyperinflation is out of control inflation and has occurred when there is a massive imbalance between the supply and demand and a complete loss of confidence in the currency. It has occurred when prices are decontrolled by central governments, like in the collapse of the USSR, where inflation reached over 1000% in some areas. [1]

The worst episodes of hyperinflation historically have been in Germany in 1923 (after World War I), Hungary after World War II, and Zimbabwe in the late 2000s.

Measures of inflation

The most widely used measure of inflation is the consumer price index (CPI). It reflects changes in the price of a representative "basket" of goods and services sold:

food

housing

transportation

furniture

clothing

recreation

other items

The inflation rate is expressed as a percentage increase in average prices over a year. For example, if the cost of the CPI "basket" rises from $100 one year ago to $102 today, the current inflation rate is 2 per cent. When the CPI rises, the purchasing power of the average consumer's dollar falls.[2]